As an alcoholic, the first step to recovery is to admit that you are an alcoholic. The same principle applies to Wall Street banks in the aftermath of the recent credit crunch: the first step to recovery is to disclose the size of losses during the recent market turmoil. At the start of October, several banks disclosed their losses, with the Citigroup CFO saying that they were returning to a “normal earnings environment”. These confessions sparked a rally in global stock markets as investors decided that Wall Street banks were on their way to recovery. But we, at The Panelist, are not popping the champagne just yet – it seems likely that solar companies will suffer from a nasty hangover when the dust settles.
Photo: bambooly, Creative Commons, Flickr

At the start of this week we had Citigroup, JP Morgan Chase and Bank of America unveiling an agreement in principle for a fund, expected to be worth up to $100 billion, that would bail out credit markets. It was a reminder that credit markets have not yet returned to normalcy, and the announcement could be a sign of more trouble to come. Tighter lending is bad news for the solar industry, an industry that has been burning through cash to expand capacity.

You probably feel like a stiff drink if you’re holding shares of Hoku Scientific (HOKU – Last trade $9.68). Hoku Materials, a wholly owned subsidiary of Hoku Scientific, recently amended their polysilicon sales agreement with SANYO Electric by extending Hoku’s date to complete financing for a new polysilicon production plant until December 31, 2007. Previously SANYO required Hoku to obtain $100 million in financing for the polysilicon plant before October 17, but challenging conditions in credit markets have forced the deadline to be extended. It can’t be good news for the future of solar when a well-established company like Hoku has trouble raising $100 million.

There are about 50 polysilicon plants waiting to be constructed worldwide, and they are all competing for financing. The polysilicon shortage will continue to choke the growth of solar unless these plants are constructed as soon as possible. Hoku’s predicament is a reminder that challenging conditions in the credit markets will likely lead to an extended polysilicon shortage as production projects are delayed.

I have argued before that we could soon be heading for a situation where there is an oversupply of polysilicon, and for that reason I have been bullish on the downstream solar companies. Considering events over the last few weeks, I have to change my outlook. It has now become clear that tighter lending conditions will be the dominant feature of life after the credit crunch, and tighter lending will limit access to funds needed to expand polysilicon production. Hoku Scientific might just be the tip of the iceberg.

As an investor, you want to invest with solar companies that will outperform other solar stocks during a polysilicon shortage. A few comments:

– First Solar (FSLR – Last trade $140.57): My gut feeling is that FSLR is long overdue for a correction, but everything we have written about so far supports the case for more FSLR upside. FSLR has a healthy cash position, so operations should remain stable if we had to see more tightening of credit conditions. But the stock's strong run over recent weeks is also an Achilles heel, and traders would gladly bag profits on the stock if we had to see another broad-based sell-off on stock markets. To read our articles on FSLR, click here, here, here and here.

– MEMC Electronics (WFR – Last trade $62.38): I continue to believe that WFR is your best bet if you believe we are in for an extended polysilicon shortage. WFR was the best performing solar stock in the month after the July 20 sell-off on Wall Street, and the company has one of the best cash flow profiles in the solar business. To read our articles on WFR, click here, here and here.

– SunPower (SPWR – Last trade $97.01): SPWR proved its resilience during the recent market sell-off, and looks like a solid investment if you believe the polysilicon shortage will end sooner than expected. SPWR had a great Q3 earnings report, easily beating street estimates. We will write more about SPWR's Q3 results next week. To read our articles on SPWR, click here, here and here.

To read my initial thoughts on how to turn the polysilicon supply problem into a profitable solution, click here.

Disclosure: I do not own any of the stocks mentioned above. I do not own a solar panel. This article was written on a hangover.
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